Mutual funds are one of the most popular investment vehicles in today’s time. The fact that mutual funds, through SIP alone, collected Rs.11,438 crore in the month of February 2022 itself underlines this fact.
While there are many factors that contribute to this, diversity choice options prove to be a very important factor. Whatever be your investment goals and risk appetite, chances are, there is a mutual fund suited just for you.
Of which, debt funds are mostly chosen by investors who have a conservative attitude towards investing. It’s a choice that offers great capital protection. But what about the yield? Will you have to compromise on returns for protection in debt mutual funds? Let’s examine.
What is a debt mutual fund?
They are mutual funds that primarily invest in debt instruments. They work like any other mutual fund – the fund house pools money from investors to invest in a portfolio, that would be debt-based. Debt instruments, including bonds, are known to have lesser market risk than their counterparts like stocks. This is because most of these instruments give fixed interest and are not market-linked. Stock markets movements could get unpredictable at times and debt instruments are hence immune from the same.
Benefits of debt mutual funds
Debt mutual funds carry some benefits, other than just being less risky, that makes them an attractive choice, let’s take a look at some of those features.
They give your portfolio stability – As mentioned above, debt instruments are not market linked and they give you returns from interest generated. This could mean that you will end up getting exactly what you are offered, no more no less. Even when the returns from debt mutual funds are much lesser compared to equity-focused mutual funds, it thus offers greater stability.
They help you hedge against volatility – Even if you are an investor that is looking for higher returns, investing in debt mutual funds could help you hedge against market uncertainties. When bears run wild, debt funds can keep your money safe and if you have a diverse portfolio that includes debt funds, you could end up with a lesser loss. It could also provide you with a safer place to park your funds when in times of uncertainty. For instance, if the markets are going down and you predict the same trend continuing for a while, you could move your money to a debt-based fund to keep it safe until the market gains stability.
It has higher liquidity –Debt mutual funds are known to have higher liquidity when compared to other similar risk investment options like fixed deposits. You can cash out your units in mutual funds at any time as there is rarely any lock-in period. However, the fund house may charge you an exit load if you redeem your units before a set period of investment. This could be different for different debt mutual funds and fund houses. Even then, the exit load tends to be a very small percentage.
Can debt mutual funds give your higher yields?
As mentioned above, debt mutual funds can give you more returns than investment opportunities that have similar risks associated with them. But at the same time, a debt fund might not be able to match the return potential of an equity-focused fund. But as we have seen above, debt funds manage that with higher stability and lower risk. Hence, the choice here should depend upon what you want out of your investment. If you want to keep your money safer with a decent amount of growth, debt funds could help you. But if you want to grow your money at a higher rate and you don’t mind the risk associated with it, a debt fund might not be the best choice for you. Talk to your investment expert to figure out your investment horizon.
